Sangamon Loan & Trust Co. v. United Shoe Machinery Co.

227 F. 401, 142 C.C.A. 97, 1915 U.S. App. LEXIS 2312

• Court: Court of Appeals for the Seventh Circuit
• Decided: October 5, 1915
• Docket: No. 2236
• Status: Published

Opinion

MACK, Circuit Judge

(after stating the facts as above). [1] It has been held in numerous cases that bankruptcy does not create an anticipatory breach of a lessee’s obligation to pay rent for realty, that the leasehold estate is not thereby terminated, and that if the lease expressly provides for forfeiture or cancellation because of the bankruptcy, but conditions the cancellation on notice and re-entry, a claim arising only after and in the event of such cancellation is not provable in the bankruptcy proceedings because it is conditional at the time the petition is filed. In re Ells (C. C.) 98 Fed. 967; Watson v. Merrill, 136 Fed. 359, 69 C. C. A. 185, 69 L. R. A. 719; In re Roth Appell, 181 Fed. 667, 104 C. C. A. 649, 31 L. R. A. (N. S.) 270; Slocum v. Soliday, 183 Fed. 410, 106 C. C. A. 56; Colman v. Withoft, 195 Fed. 250, 115 C. C. A. 222; Cotting v. Hooper, Lewis & Co., 220 Mass. 273, 107 N. E. 931.

Assuming, without deciding) that this is equally true of a leasehold of chattels, it would follow that bankruptcy of the lessee would not end the lease, and that if the reserved right to cancel it on bankruptcy were conditioned on notice to the lessee, a claim for moneys to become due at the termination of what is in form a 17-year, but in substance a perpetual, though terminable, lease, could not be allowed as a fixed liability absolutely owing at the time of- the bankruptcy. Shaw v. United Shoe Machinery Co., 220 Mass. 486, 108 N. E. 68. And in Re Jorolemon-Oliver Co., 213 Fed. 625, 130 C. C. A. 217 (C. C. A. 2d Circuit), the court rejected a claim similar to the one now in question because it interpreted the lease as providing for termination only if and when notice should be served. „ Contra, In re D. C. Clark Shoe Co., 211 Fed. 341 (D. C. Mass.).

It is to be noted, however, that the subject of the cancellation of these leases is dealt with in two separate paragraphs; in both the termination is at the lessor’s option; if the right arises because of a breach or default by the lessee, notice in the form prescribed is made essential by the express provisions of the lease; but if because of insolvency or bankruptcy, no formal notice or re-entry is required.

If, then, these leases were ended; not because of the lessee’s default Or breach, anticipatory or otherwise, but because of its bankruptcy, the termination was coincident with the bankruptcy itself. Inasmuch as the lessor had an option to maintain the leases in full force notwithstanding the bankruptcy, it was uncertain, until the lessor in some way manifested its election, whether or not the leases had terminated and the obligations conditioned thereon had become fixed and absolute. This uncertainty, however, was as to the existence, not as to the nature, of the liability. If, by reason of the election, the bankruptcy did end the lease, then the obligations were absolute as of the time that the petition in bankruptcy was filed.

The situation is exactly analogous to that arising on the repudiation of a contractual obligation. The obligee may accept or reject it as creating an anticipatory breach; until he manifests his election, it is uncertain whether or not the contract has been broken; if, however, he does elect to treat the repudiation as an anticipatory breach, it is not his election but the repudiation, express or constructive, that creates the breach and the liability to respond therefor in damages. In those cases in which bankruptcy is held to be a constructive repudiation, and thus to enable the obligee to elect to regard it as an anticipatory breach of contract, he may file his claim for damages in the bankruptcy proceedings because the breach is occasioned by, and thus the claim arises coincident with, and not after, the bankruptcy, and is unconditional at that time; and this, too, notwithstanding the uncertainty, until the election is manifested, whether or not any breach has been in fact committed, and therefore whether or not any claim or liability therefor in fact exists. In re Scott Transfer Co., 216 Fed. 308, 132 C. C. A. 452; contra, In re Montague & Gillet, Inc., 212 Fed. 452, 32 Am. Bankr. Rep. 106 (D. C. S. D. New York). Because the obligee is not bound to consider repudiation before maturity as a breach, but may continue to treat the contract as in full force, the obligor’s discharge in bankruptcy has been held to be no defense to an action for the later actual breach of a conditional obligation at its maturity. Phenix National Bank v. Waterbury, 197 N. Y. 161, 90 N. E. 435.

[2] As the uncertainty in regard to the existence of a liability is due solely to the inability or failure of the obligee to manifest his election at the instant of bankruptcy or other breach, and as his right of action arises at once at the moment of the anticipatory breach, his subsequent election by suing or filing a claim is properly given retroactive effect in the absence of any act inconsistent therewith. And similarly in this case: By its express provisions, bankruptcy terminated the lease at the lessor’s option; the filing of the claim evidenced the lessor’s election to treat the lease as canceled by the bankruptcy; the obligations contingent on termination thus became fixed, absolute, and certain, coincident with the filing of the bankruptcy petition.

[3] While no notice was required, the one actually served on the bankrupt’s receiver a few days after the petition in bankruptcy was filed is not inconsistent with this position; though it 'states that the “leases are hereby terminated,” it begins with a notification that “we have elected and hereby declare our option to terminate” all leases; in our judgment, it was intended, not to make the cancellation effective only from the date of service, but to evidence an election theretofore made, and to notify the parties that the lessor’s rights resulting therefrom would be enforced.

[4] The so-called return charges, as well as freight and repair expenses, became absolutely due and payable on the termination of the leases; that is, at bankruptcy. Actual redelivery at Beverly was not a condition precedent to the payment of the fixed sum of $100 per machine, specified in “Form 1.” A waiver of the obligation to ship some of them to Beverly, and the acceptance at the bankrupt’s factory and subsequent letting to a third party, cannot be deemed a release of the claim for this $100 per machine.

The judgment of the District Court allowing the claim in full for the return charges and tire actual freight and repair expenses, stipulated to be a reasonable charge therefor, on the machines returned to Beverly, must be affirmed.

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